I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

Certain Lefty Economists Do So Annoy Me

Or perhaps it’s just anything that manages to get published in The American Prospect that raises my blood pressure. The latest attempt is by a couple of assistant professors (OK, one, I could only be bothered to look up one author of this nonsense) claiming that Pigou Taxes could be used to solve the problem of inequality.

There is a very slight problem with this idea in that they don’t propose taxing inequality itself, as a Pigou Tax would require, but high incomes, which is something really rather different.

Pigou, a key bridge figure in the history of his field, was one of the earliest classical economists

No, Pigou, as the successor to Marshall, was very definitely a neo-classical economist. He is not to be classed with Marx, Ricardo and Smith, he is very definitely post the marginalist revolution. But that’s the sort of distinction only a pedant like myself could love. But you certainly cannot appreciate Pigou’s analysis of externalities without using marginalist concepts, so it is important even if pedantic.

However, there’s a much larger problem that I have with the analysis:

Economists who specialize in these matters, including Thomas Piketty, Emmanuel Saez, and Peter Diamond, typically argue that a marginal rate around 70 percent maximizes revenue.

No, no they don’t. They argue instead that in the absence of allowances that a total top taxation rate of 70% on high incomes would be revenue maximising. The clarification is important in two ways. The first is that this is the total rate. This includes employer paid taxes on employment: say the couple of percent charged for Medicaid in the US. Oh, and State income taxes. Which makes a substantial difference in places like California and New York (and even more in NYC). The second is this part about allowances.

This is a bit of a catch all really. It includes such things as the mortgage interest deduction, charitable giving, pension tax credits and so on. If there are ways that top earners can turn income into near income while lowering their tax rate they will to some point. It also includes concepts like income switching: say, from income to more lowly taxed capital gains. When the tax system has these things in it then that revenue maximising rate falls to something like 54%. And recall, this is the total tax rate. And high earners in some parts of the country are already paying that, aren’t they? Or darn close to it.

So far, so good. But how might high marginal tax rates affect overall economic growth? The conventional wisdom holds that high rates are a threat to growth. The conventional wisdom is wrong.

Well, no, not really. The conventional wisdom is that high taxes on returns to capital are damaging to economic growth taxes on labour income not so much. So testing growth against income taxes isn’t really testing that conventional wisdom. And that’s why the conventional wisdom states that we should have different tax systems for capital returns and labour income. And, as soon as we do that then we’ve got allowances and the possibility of income shifting collapsing that revenue maximising tax rate down to around 50%. Which, as we’ve already noted, some people are already paying.

And this is what annoys me. We can all read these papers these days. We can all parse Piketty and Saetz’s arguments, read the wisdom of Diamond. So why on earth do people try to write Op/Eds that deliberately ignore the points that they make?

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